A nearly depleted triple-A-rated school bond guarantee program in Texas will get a huge capacity increase after the state board of education lowered the amount set aside for a reserve. 

The reduction in the Permanent School Fund program’s reserves to 0.25% from 5%, which was approved earlier this month, along with additional capacity from February bond payments and maturity of outstanding guaranteed bonds, will increase the availability of the guarantee by $7 billion to $9 billion, according to a statement from the PSF.

“This additional capacity is expected to be available for the February round of new money bond guarantee applications,” the statement said, adding it “should help alleviate program capacity concerns in the short term.”

Amid a slew of school debt approved by Texas voters last year, the program has experienced high demand that shrank its projected available capacity from $3.97 billion at the end of August to just $26.65 million at the end of December.

As a result, the Texas Education Agency has been giving schools with the lowest property wealth per average daily attendance priority for the guarantee, leaving many districts to sell bonds based on their own underlying credit ratings. Some have purchased insurance for their bonds.

School districts including Austin, which sold $551 million of bonds in January, faced higher yields without the guarantee.

The program, which is capped at $117.32 billion by the Internal Revenue Service, last reached capacity in 2009, forcing the Texas Education Agency to stop accepting applications. It reopened in early 2010 after the IRS increased the limit in December 2009.

After legislation to permanently remove the IRS limit stalled in Congress last fall, U.S. Rep. Lloyd Doggett, D-Texas, in January introduced the Keeping Texas School Construction Costs Down Act of 2023.

PSF-wrapped bonds are popular with investors due to their liquidity. In the event of a default, which has not yet happened in the history of the program, bondholders are paid by the PSF and that money is then taken out of a district’s next state aid payment. 

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